BRIEFLY SPEAKING: BEST PRACTICES FOR QUALIFICATION
The process of registering to do business in another state can be complicated. Every jurisdiction has its own requirements and knowing how to register so you’re qualified to operate legally in a foreign state is critically important.LEARN MORE
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CSC is here to help you avoid common mistakes related to name availability, document filing and payment of taxes and fees. Join us for the latest in our Briefly Speaking series – Best Practices for Qualification.
This 30 minute webinar will cover the most common challenges in foreign qualification and a discussion of requirements specific to California, Delaware, Illinois and New York.
Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.
Caitlin: Hello, everyone, and welcome to today's webinar, "Briefly Speaking: Best Practices for Qualifications." My name is Caitlin Alaburda, and I will be your moderator.
Joining us today are Patrick Nolan and Helena Ledic. Patrick has been a CSC customer service specialist since 2003 and has 35 years of experience in the legal services industry. Patrick provides exceptional customer service to business, legal, and financial professionals worldwide by helping form corporations, limited liability companies, and other business entities while also maintaining their good standing in all states and many international jurisdictions. Helena is an associate general counsel for CSC in the Chicago office.
And with that, let's welcome Patrick and Helena.
Helena: Thank you, Caitlin, for that introduction. Before we get into our presentation today on qualifications, a little bit about CSC first. We like to say that we're the business behind business, and what we do is we provide knowledge-based solutions to our clients worldwide. We work with every phase of the business life cycle, helping to form entities, maintaining compliance, executing secured transaction work, and then working with real estate, M&A, and other corporate transactions. And of course, as we'll learn today, we work with qualifications.
We work with more than 10,000 different law firms, 180,000 corporate customers, and we serve 90% of the Fortune 500.
So for the business that's behind business, where are the CSC offices? You can see that we have offices throughout North America, Europe, and Asia-Pacific, and you can see that we have what would be office number one is the star and that's our headquarters in Wilmington, Delaware.
Now before we get started with our agenda today for qualification, I do want to point out that these situations can be very fact specific, and Pat and I are not rendering legal advice to you folks. But we are certainly reminding you that you need to review the statute for every state where you have concerns and considerations. So kind of keep that in mind as we're going through this. We're going to be talking a little bit in generalities.
So for our agenda today, we're going to be talking about qualification. And so what it is, is that if a corporation is engaged in intrastate commerce in a state other than its incorporation, it has to examine and comply with the foreign state's qualification law. So we'll be looking at what triggers qualification, the considerations, common challenges, and questions.
And as a reminder, this all came about with the Model Business Corporation Act. Most states follow this in all or in part. The last major revision was in 2016, and the Model Business Corporation Act and I should say the revised goes into quite a bit of these considerations so that you can look into things a little bit in greater detail.
So the first topic that we're going to cover is what actually triggers qualification. So before we get into what qualification is, I do want to mention again that Pat and I are not providing legal advice to you and that there is that reminder that this is very fact specific and you need to review the state statute for every state with the qualification issues.
So now let's talk a little bit about what qualification is, and that's that process of registering an existing domestic corporation and then registering it into another particular state where it's planning to do business, and that's considered to be the qualification. So if you're doing business elsewhere, you need to do a qualification.
Now, of course, when you qualify, you have to have separate filings, compliance filings. You're paying separate fees, taxes, and associated other events. And of course, if you don't have to do that, you don't want to and then that means you don't want to have to qualify or you're trying to see whether or not you need to qualify. So that's one of these considerations that we will certainly be going and looking at today.
So for the audience you've heard me mention several times about needing to review the statute or the statutes for the given state. At the end, I'll show you where CSC publishes a book where you can get some extra information. We publish a 50-State Guide to Qualification. And when you go through that book, what you learn is that sometimes it's easier to figure out what are the activities that generally do not require qualification.
And so here are some of the activities that we have that generally don't require qualification. Now remember, though, it's different in every single state.
So the first one is engaging in litigation, and this is the classic example where an entity will want to bring a lawsuit, a corporation, but they have not qualified in that state. So maybe the defendant is trying to get the suit dismissed. Those generally do not require qualification, but you've got to dig a little bit deeper into it.
Another one that's on the list is holding board of director meetings or other internal activities in a foreign state. So a classic example of that is maybe there might be an annual sales meeting or a board retreat might be in a state where you're not qualified in, and that typically will not trigger a qualification.
Simply maintaining a bank account that you can get a better interest rate in a bank in a different state, that generally doesn't require a qualification. And along with that is maintaining offices or agencies for the transfer of securities, same idea.
Now selling through independent contractors, so an independent contractor will be in a given state and they'll sell your goods. That generally also doesn't qualify for a qualification.
And then soliciting orders by the mail or other channels, but that's when that contract is executed at an office outside that state. So if it's executed in the state, that may trigger a qualification for you.
On another instance where you generally don't need to worry about qualification is if you are creating or acquiring indebtedness and securing or collecting debts. So the classic example of this might be a credit card issuer attempting to collect on a credit card holder that is in default as being delinquent in their payments. So that's an example of that.
Owning real or personal property does not necessarily require a qualification.
Another one is isolated transactions completed within 30 days. Although some states have got longer time periods. I believe Illinois goes up to 120 days. I think that there's even one or two where that's ongoing, and that is typically there might be an extended sale or something along those lines, but it's an isolated transaction that happens.
Interstate commerce. So that generally doesn't quite require qualification. So if intrastate is incidental to the interstate commerce activity, it won't trigger that qualification. But if something is routinely localized, that will typically require a qualification.
And then there's also the last one that we have on our list is responding to state-declared emergencies. So these will be frequently things such as natural or man-made disasters, so things such as earthquakes, hurricanes, chemical spills, oil spills, fires, things of that nature. And so some states have got provisions that companies that help out with that do not need to be qualified in that state.
So interestingly enough though is I looked at our book this morning, as I was preparing for today, is that Florida, where we've had that recent Hurricane Ian, is not listed as a state that has that exemption over there from qualification. Another state, an earthquake-prone state is California. They're another one that's not listed like that.
And again, sometimes it's easier to determine whether or not you need to qualify by looking at the activities that don't require qualification.
So we talked about the activities that generally don't require qualification. Now let's look at the activities that generally do require qualification.
And the first one that we have on our list is for the certified public accountants. If you are licensed and you have an entity formed in one state, a corporation, but you are along maybe the border and you have clients in the adjoining state, you generally have to qualify in that other state.
If you're advertising and your reach is going to be going into other states where you're not qualified and it's going to be there on a regular basis, of course then you have to do those qualifications.
Banking situations beyond just holding a simple account generally require a qualification. Interestingly Alabama, Delaware, Ohio, and Oklahoma are silent on this. So that's really a totality of the circumstances that you have to look at for qualifications.
Construction issues. Construction companies generally have to qualify in other states. So you've got your home state, but you're doing regularly construction work in another state, you have to qualify for that. Now that's really though distinguished of the construction versus installation. Many states have carved out exceptions for corporations that are installing specialized equipment. So if it is a short-term project that you're installing some specialized equipment, you don't need to do a qualification there.
Now if you're selling in a given state, that usually requires qualifications, also with third-party sales.
And then, of course, the big one is merging with another entity that is already qualified. So if you have that kind of a situation, perhaps there's going to be name changes or something like that, that will of course require that qualification there.
So we've talked about the activities that trigger qualification, that don't trigger qualification. Let's talk about what happens if you actually fail to qualify, what some of those consequences are.
So the most common one is that you typically will not be able to gain access to the courts for civil matters. So the classic example of that is you have not qualified in a given state. The corporation wants to bring a lawsuit as a plaintiff, and the defendant then moves to have it dismissed because that plaintiff corporation is not qualified in the state. So that's the most common example. I will say typically states will allow that defendant, or I'm sorry the non-qualifying corporation to then qualify and then the suit can typically proceed then.
But the other things that will happen will be that there will be monetary penalties imposed on those corporations, including fees, taxes, and interest. And of course, if you don't have to qualify, you don't want to, the corporation doesn't want to because then they're in charge of having to pay those fees, the compliance, and all of that. But sometimes that failure to qualify can then bring in the additional penalties and interests. Now frequently this isn't very substantial. It's more to get you back into compliance, but it can still end up amounting to considerable amounts over there. So, for example, in Alaska and Nebraska, entities can be paying as a penalty up to $10,000 a year per entity that they haven't qualified. So it can be steep in some states. And frequently this is done is so that the qualifying states are trying to discourage unfair competition with their own in-state companies and that's why they're requiring that qualification. But again, you just don't want to get into that situation over there.
There can also be monetary penalties on directors, officers, and agents for violations, and sometimes even criminal misdemeanors. So there are examples of some civil penalties, with stronger civil penalties in Utah, North Dakota, Virginia. But the criminal ones are actually Ohio, California, and Maryland, where they will have misdemeanor criminal penalties over there. So that's certainly something for the officers and directors to keep in mind.
And another general consequence of failing to qualify is not being able to obtain a government-issued business license that you would need to be able to operate your business. So if you don't qualify, you're not able to end up getting that government-issued license. And again, these situations sometimes can be very fact specific. You need to be able to look at that statute and get the legal advice on that.
So we've heard up to now about the different things that will typically require qualification or may not, but now what we're going to go into is the considerations for qualifications, and we'll be hearing from Pat now about that.
Patrick: Thank you, Helena. Ideally the best time to check a name is before you have formed the entity, but that's not always practical. Usually a prudent businessman, when he's thinking of starting a business, is very focused on where he wants to have the business and things of that nature. So he's not talking about expansion at that moment.
But if you find yourself in a situation where your business is thriving and you want to move into other states and you have not checked the name, it can be done. And what a name availability search is, is a check, either by telephone or a database, to make sure that the name is available, that it doesn't conflict with another business entity or has any other issues.
A name check is not a guarantee that the name will be available at the time of filing. There are other means to temporarily hold a name, and we'll discuss them now.
The simplest one and almost every state I think, except Florida, permits it is a name reservation, and that's a filing made to reserve that name for a specified period of time, usually between 30 days to 1 year. Most cases it can be renewed if your business is not ready to move into that state at the end of the name reservation period.
Or another way, but not every state allows it, is name registration. Now the caveat with a name registration is that the company has to be up and running in some state. A name reservation, you can reserve a name without having a business entity. But for a name registration, you have to have an entity formed, and there are believe about 35 states that permit name registration, and that's more of a long-term reservation, usually good for one year. So if you're seeing your business thriving and you're thinking of moving south maybe, if you're a Northeast business, but you don't want to deal with the hassles of a name, you can register your name if the state permits it.
Okay. So the selection of a name may not be as easy as it seems because all states are different. They have different statutory provisions that affect the selection.
Every state places restriction on words that can be used in a name. Many states provide that a corporate name cannot contain a word or a phrase prohibited by law. And some examples of those are bank, finance, insurance, savings. Also in addition, every state requires a corporate indicator. I should say most states because I believe California is one that does not.
But getting back to those examples, I can't remember the exact name, but I once had an entity, let's call it 123 Bank Street Holdings Corporation, that wanted to be formed in New York and clearly it was like a real estate holding company or something of that nature. But because it contained the word "bank," the client was forced to get consent from the Department of Financial Services, which covers banking services in New York state, and that took them about two months to obtain. It's a very slow, time-consuming process.
And there are other states that you have to get special permission to use these words that are on our screen as well.
Helena: And it's not just words like that, that you see, such as like insurance or savings or credit union. It could be other words. So for example, in Arkansas, the word "Razorbacks" is not permitted unless you're associated somehow with the university. And then my favorite example is if you're in the state of Florida, you can't use the word "Disney." So if I wanted to, if I had a business and I wanted to qualify it or form it in Florida, I would not be able to do Helena's Disney T-shirts. That's not permitted in Florida.
So it's really important to look at all the regulations for that given state or all of the statutory provisions. And CSC actually has a place on our website, called the Procedural Summaries, where you can learn about that, and I'll show that later on towards the end of our presentation.
Patrick: Thanks, Helena. Okay. So name availability. So in every state the name cannot be the exact same name as an existing entity. There has to be some distinguishing characteristic. And states change. Some are more liberal. Some are a little more stringent. But you have to check the name to make sure that it won't be a direct conflict with another entity that's either organized, qualified, registered, or reserved in that state.
Now again, once we hopefully tell you that your name is available, you may wish to reserve it or register it. But even any one of those three things that you get a positive response on does not mean that there may not be a possible trademark infringement. So that's always a good thing to look into if you're marketing a product or a service.
Okay. So hopefully your name is available. What do we do if it's not available? Well, when we're told by the state that a name is not available, the first thing we're going to ask them for is the name of the conflicting corporation, the date it was incorporated or qualified, the name and address of the registered agent and office, and whether the state will accept a consent to use of name. We'll talk a little bit more about that in a while. We'll also ask them whether the state will accept use of a fictitious name if the name is not available.
Okay. So we mentioned before that if your name is not available, we would ask if the state would accept a consent to use of name. And again, not all states do, and sometimes even those that do, do not have a specific form of consent.
For those that do not have a form, consent should be given on the company letterhead. And a good example of that is the state of Delaware. It's very common now to form an LLC. A client might have a corporation in a state, let's just call it XYZ Industries Inc., and for whatever reason he needs an LLC and would prefer it to have the same name XYZ Industries LLC. Delaware is one of the few states that will allow those two names to stay side by side provided that you can get them a consent to use of name on the letterhead of the corporation, stating that it hereby consents to the use of the name by the LLC.
So if it's a corporation granting the consent, the consent letter should be signed by an officer. If it's an LLC granting the consent, it should be signed by a member, manager, or authorized person. Very rare but it has come up, if a limited partnership is granting the consent to an LLC or a corporation, it should be signed by the general partner or a general partner with a limited partnership.
Okay. So we've decided that we have to qualify to do business in a state. We've checked the name. The name is available. As Helena mentioned earlier, we have to file a form, and that's ready to go. But we also need to order a supporting document.
Almost every state requires proof that the entity exists and is in good standing in its domestic state in order to file an application for authority to qualify. A great many of the states that do require good standings, these certificates can be obtained electronically. There's a certain amount of states, a handful that require a certified copy of the certificate of incorporation or formation as the case may be. But all states really want some proof that the company does exist and has a valid existence in its state of formation.
Some examples of states that require a certified copy are Arizona, Illinois, Nevada, and Virginia. But again, we reiterate although I mentioned that a lot of states issue things electronically, these supporting documents, there are still a few that you have to get them manually. So beware mindful of time delays.
Okay. Another important consideration for qualification is the need for a registered agent. Almost every state requires that you have a registered agent within the boundaries of the state you're qualifying to do business in. And the primary duties of that agent are to receive and forward service of process, establishing a physical presence in the state, provide compliance services. For example, most states have a requirement that you file an annual report each year to stay in good standing, and that's the number one reason that companies lapse out of good standing is that they don't file their annual reports. Usually these annual reports are sent to the registered agent. So if you do business with CSC, you want to make sure the address we have on our records for your client, if he's the one charged with filing annual reports, is up to date. And also other types of communications are sent through the registered agent.
Now not every state requires a registered agent, but I'd say all but two or three do. My own state of New York, the Secretary of State is the registered agent. You have to provide the Secretary of State an address to which you forward service of process, which can be anywhere in the United States. If you want to, you can designate an additional registered agent, but in New York, you don't have to.
Helena: So Pat has walked us through the considerations for qualification. What he's now going to do is he's going to talk to us about some of the common challenges in the states that we seem to get the most questions in or we have the most qualifications with.
Patrick: Thanks, Helena. So now we're just going to mention a few of the more popular states we'll call them and some of the things that cause filings to get rejected.
It's very common that a client will execute, will sign a form, but they leave the date blank. Usually when a paralegal or whoever is preparing a form, they'll leave the signature line blank, and they'll also leave the date line blank. But it's not uncommon that it comes back without the date filled in.
Also inconsistent entity names. Usually, in most documents, the name appears two or three times, so sometimes in the heat of battle you might be preparing a form and you'll use one you had used previously and you change it in one spot, but you don't change it consistently throughout the document. That can be an issue.
Another big one is the document is not properly signed. Nowadays a lot of states accept conformed signatures and electronic signatures. Not all, but a lot of them do. But the states that don't, you've got to make sure you follow their rules and have a wet signature on it.
Another thing is the inconsistent use of the registered agent name or address. Now our company moved a few years back, and it's not uncommon that we still see a document that has our old 2711 Centerville Road address on it instead of our present address.
So those are just a few of the common issues with the state of Delaware. Okay, now to speak to my own state of New York.
New York, on all filings you have to list the county where the office is located. For a formation or a qualification, you also have to have a service of process address, as we mentioned earlier, and that address must be in the United States.
You have to have the name and capacity of the signer below the signature line. So, for example, if an LLC is filing an application for authority, it has to be signed by a member, manager, or authorized person. So you have to pick one of those three and have that after the person's typed name.
Registered agent cannot be a "care of," so you can't say care of Patrick Nolan. If you want to designate Patrick Nolan as the registered agent, it's just simply Patrick Nolan. Or it can't be care of a company, better example.
The home state and the date of incorporation must show on the document.
And this is a unique thing to New York is that it must have a backer, with this section of the law, the name of the entity, and the filer. Now even though physically it might be a service company that's bringing the document to the state, the filer is usually either the law firm or the company itself, the person more or less responsible for the filing.
Another thing, as we mentioned earlier, in most cases you have to provide a good standing certificate with your qualification forms. Sometimes something as simple as a period missing from the name on the application that is on the good standing certificate will cause the rejection of the document. So you have to pay special attention to make sure that the good standing certificate matches the application, and we at CSC do our best to make sure that that happens.
Okay. Another thing to consider about qualification filings that it's not just filing an application for authority with the secretary of state or another state official. There are sometimes other types of filings or recordings, or in this case publication that has to be done. For example, in Kentucky, if a corporation files for authority, it files with the secretary of state, but then it has to record a copy of its application with the county recorder where the registered office is located.
Some other states have publication requirements. The big one, again, is my own state of New York, where you have to publish once a week for six consecutive weeks in two newspapers designated by the county clerk. And it's good to be mindful of that because it can be very expensive, especially if your office, which is mandatory to be put in the application, is New York County, because right off the bat you get the "New York Law Journal," which in and of itself is in four digits.
So another thing is we'll help you with that the preparation of the publication. Once it's run its course, we get affidavits back from the publication. A certificate of publication has to be prepared and then filed with the affidavits with the state. CSC can, with your permission, prepare that certificate of publication and conform the signature. And again, if it's an LLC, it has to be signed by a member, manager, or authorized person.
Ironically, publication in New York does not apply to corporations. It applies to LLCs as well as LPs. So if it's an LP that's doing the publication, the certificate has to be signed by a general partner.
Okay. Now we're going to just talk about some of the Illinois best practices or things that you should be mindful of that are contained in your application. Illinois, you always have to put the principal place of business on the application, and CSC's address cannot be used.
Signor titles must be on LLC and corporate qualifications. So again, you'd have to say whether it's a member or manager.
There's a question on the form, and it's pretty unique to Illinois. It's, well, 10a through 10d asks you questions of this nature — your property and business in Illinois and then your property and business everywhere. And what Illinois does with that is that fraction that comes out, they use it as a basis for your filing fees. So in other words, if 10% of your business and property are in Illinois versus the United States, then your filing fee is 10% of the fee that is based on your paid-in capital. Now I know that's a little complicated, but it's just something that's unique to Illinois and something to be mindful of.
They're always big on stock questions. They want to know not only your authorized shares, but also your issued shares and your paid-in capital, and your paid-in capital is what's used to base your entrance fee. So if you have a very high paid-in capital amount, you're going to pay a very high filing fee. If you have a very high paid-in capital amount, but only let's say my previous example a tenth of it is attributable to Illinois, then your filing fee will be a tenth of what it would be if all of your business and property were in Illinois and all of your capital was allocated to Illinois.
They also are particular about the purpose clause. If you're a Delaware corporation, you can say "to engage in any lawful act or activity which corporations can be formed for under the General Corporation Law of Delaware," but you have to add "and the corporation law of the state of Illinois." Their state has to be included in there.
Okay. Now we're going to move on to the great state of California, and I believe this is the last of our examples for some of the more popular states. California, you have the ability now to e-file most documents or still use the over-the-counter service. If it goes over the counter, they need a wet signature, although a scan is acceptable. If you're filing online, the signature is keyed in.
Like all states, a good standing is required, or I should say a supporting document is required. And California wants the date and name listed on the good standing certificate, and again it must match what's on the qualification form. So the date has to be listed on the good standing for California.
If listing CSC as the agent, it's very common to just plunk us down as "Corporation Service Company." But in California, our name is unfortunately a little bit longer and has to be put down exactly as it's set forth on the screen, "Corporation Service Company which will do business in California as CSC-Lawyers Incorporation Service."
Okay. You've got make sure you're using the most current state forms. Also, once you're qualified and you file a statement of designation, you're good to go. But within 90 days you have to file a statement of information, and that's kind of like an annual report. It's there where they ask for the offices and directors.
Okay. And just one little note. If you're filing online, your purpose clause cannot be over 50 characters.
Helena: Thanks, Pat, for walking us through those common challenges with those different states over there of Delaware and then New York, California, and Illinois.
Now what we're going to do is we're going to look at some of the additional resources that CSC has that are available.
The first resource I want to point out to customers is that we have forms on CSC Global. Now you do have to be a customer of ours, have an ID and a password to be able to log in. But we have the most current forms available for our customers. We look at the state websites every day just to make sure that there hasn't been a change.
So you can see over here, this example is that we want to do a New York qualification for an LLC, check, check, check, and then what we can do is we can click the button and pull up the form.
Another resource that CSC has for our customers are the Procedural Summaries. Again you need to be able to log in to CSC Global over here. But when you look at the Procedural Summaries, it will lay out what I call the rules and regulations for that entity for that given state. So for our example, over here where we were talking about the New York forms for the qualification for an LLC, this will tell you what the requirements are, your filing fees, publication requirements. And the screen is cut off, but if you were to go scrolling down longer, you would see those prohibited words that we talked about earlier, when Pat gave that example of "bank" with New York and then some of the other states. We would see all of that available here. But again, you need to be able to log in to view the Procedural Summaries.
Now the other thing that we have is we also publish books. So we partner with LexisNexis to bring you different legal and compliance resources. So you can see over here on the slide is we have "The CSC 50-State Guide to Qualification." That's what Pat and I have been referring to. It is updated every single year. So you can purchase a desktop copy. Very, very handy guide.
And then the other thing is that we also publish for different states where we cover the different corporate entities, such as the Business Corporations Act, different things along those lines, UCC and things like that. So we also have those available on our website or at LexisNexis for purchase.
A complementary resource available to everyone, not just to CSC customers, is the "Doing Business Outside Your State Guide." This is updated every year. It comes out somewhere around the beginning of July, 4th of July or so, and what it does is it gives examples of those most common activities and whether or not that that will trigger a qualification in a given state. It also references statutes that you can go at and look in greater depth. Anybody can download a free copy of this. It's a PDF. It's an excellent resource. I recommend that everyone in your organization have a copy of this.
And then the last thing that I do want to point out, and again these are complementary materials, is that as you're listening to our Briefly Speaking webinar today, we have our recordings of our previous webinars and you can sign up for future ones. And then we also have such as insight reports, other webinars, and our blogs, that you can also sign up for, that can help you with your legal and compliance needs.